Tuesday, July 29, 2003

Last night, I saw some jackass Congressman denouncing the terrorism threat-bet concept as “just plain immoral,” and Hillary Clinton called it a “futures market in death.” Now, I’m not entirely sold on the notion of ideas futures as an efficient means of assessing risks, for reasons I’ll explain below. But to condemn the program out of hand just because it sounds morbid is truly stupid. The question should be a factual one: would these betting markets in fact provide the authorities with better information about likely terrorist events without making such events more likely? If the answer is yes, then I think it would be immoral not to use them.

And it’s quite obvious that the Congressmen who’ve been criticizing the idea really don’t understand it at all. The most common charge is that it would allow terrorists to profit from their planned terrorist acts, because they could engage in a kind of insider trading. As Barbara Boxer puts it, “terrorists knowing they were planning an attack could have bet on the attack and collected a lot of money.” Hmm, let’s see how this would work. Suppose Ahmed the Terrorist is planning to blow up the Seattle Space Needle. So he does months of planning, all in secret so he won’t get caught. And then he gets the brilliant notion of making money at the same time, so he logs onto the DARPA website and buys a whole bunch of shares of “Seattle Space Needle gets blown up.” The price suddenly jumps, and the authorities immediately focus their attention on potential threats to the Space Needle, making it much more likely that Ahmed’s plot will be foiled. That’s exactly how the system is supposed to work.

The problem, as I see it, is that some terrorists won’t be as stupid as Ahmed. Instead, they will spend money with the deliberate purpose of driving up the price on other events -- ones that they have no plan to make happen -- with the intent of drawing attention away from their real plans. Or if they were really foresighted, they could start buying shares for the events they intend to make occur months in advance, and then deliberately dump their shares a little while before the plan goes into effect so that the price goes down. Or they could just buy and sell randomly, in order to create noise in the data. Would they lose money doing this? Yes, but terrorists have shown a great willingness to spend money in order to hurt people.

In short, the terrorism threat-bet plan might not work, but the critics’ criticisms are exactly backward. The problem is not that terrorists would be enabled to make money on their own criminal acts, because the very act of trying to make money on your terrorist plans is exactly what would thwart them. The problem is precisely the opposite: that terrorists might deliberately lose money in order to foil the system.